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How to Use a Self-Directed IRA to Start a New Business or Startup

May 29, 2020

Using Self Directed IRA to Start New Business Startup - Infographic
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Investing in start-ups has merits in terms of enabling the money to grow. Unlike choosing traditional investment options, you are able to diversify your portfolio and invest your retirement funds on start-ups with a Self-Directed IRA (SDIRA).

SDIRAs open up your investment options to areas outside the stock market, such as real estate, metals, and even start-ups. Therefore, one can also utilize funds of a Self-Directed IRA to start a business or start-up. As start-ups are not publicly traded initially, traditional IRAs do not finance.

Getting Started

You can get started as soon as you find a start-up that is open for investment. Although you can individually choose to invest from your own SDIRA, yet that is not a prudent option. Instead, you should join a syndicate—a group of investors acting as a single entity—so that the total investment amount is higher and no only person taking additional risks.

In case you spot a start-up for investing from your SDIRA, but there is no syndicate for the company, you can get in touch with a Syndicate Leader. Gathering funds, vetting companies, and completing investments are the prominent roles of a Syndicate Leader.

The Rules You Should Know

Before utilizing funds of a Self-Directed IRA to start a business or start-up, you should gain a complete understanding of the existing rules. Among the various rules, you need to familiarize yourself with the prohibited transactions or “self-dealing” rule. If you invest in a start-up in which you already own 50% or more stake, your investment will correspond to a prohibited transaction, which is not allowed.

However, there is a condition in which you can make a prohibited transaction. If you receive a current personal benefit from the start-up that should otherwise flow to the SDIRA, you can complete a prohibited transaction, regardless of ownership percentage.

The Four Initial Steps

1. Find and delegate to an experienced custodian the task of establishing your Self-Directed IRA.

2. Initiate a rollover from your existing IRA, or your 401(k) or 403(b) account, to the Self-Directed IRA.

3. Set up a Limited Liability Company (LLC), the legal entity for your business. The owner of the Self-Directed IRA will manage it.

4. After establishing the LLC, you can start purchasing the membership units in it by the funds in the Self-Directed IRA.

The Advantages

SDIRAs allow a slew of advantages over traditional investment options. The following are those:

Tax-Deferred or Tax-Free Growth

Tax benefits are one of the perks in investing in an SDIRA. Your account will grow either tax-free or tax-deferred, depending on the type of IRA you choose. With traditional IRAs, your contributions will grow tax-deferred, and that means your contributions will be taxed after you withdraw your funds upon reaching the retirement age. The funds, post-withdrawal, will be taxed as income. In contrast, an SDIRA is a tax-free option—the funds after your retirement age will not be subjected to taxes.

Asset Protection

SDIRAs offer a significant advantage in comparison with traditional IRAs—asset protection. A Self-Directed IRA is protected from federal and state bankruptcy. So, if something falls upon you, your spouse, children, or grandchildren can avail of the benefits of your Self-Directed IRA, according to your preference.

Higher Return Rates

The long-term investments in a Self-Directed IRA grow much faster than any other IRAs due to higher return rates.

Control on Investment

With a Self-Directed IRA, you can exercise complete control over your investment. You are free to decide what to invest in, where to allocate your funds, and how far your investments should be spread. You will be able to give your custodian the necessary instructions, and you will make the changes you desire.

Beyond Traditional Investments: Alternative Assets

With a Self-Directed IRA, you can expand your investment beyond the traditional instruments, such as stocks, bonds, and treasury (allowed by traditional IRAs). You can expand your investment to many alternative assets, such as real estate, precious metals, private loans, trust deeds, and even start-ups.